National Controls Corp. v. National Semiconductor Corp.

Appeal from the United States District Court for the Western District of Pennsylvania, Pittsburgh, Civil No. 84-2996.

Becker, Scirica, and Rosenn, Circuit Judges.

Author: Rosenn

Opinion OF THE COURT

ROSENN, Circuit Judge.

Defendant, National Semiconductor Corporation (NSC), appeals an adverse jury verdict in a breach of contract and warranties suit brought in diversity by National Controls Corporation (NCC) in the United States District Court for the Western District of Pennsylvania. NSC asserts that it was entitled to a judgment notwithstanding the verdict (judgment N.O.V.) because the jury's award of $1,400,000 in damages was based on its improper consideration of consequential damages and the trial court's erroneous instructions with respect to such damages. NSC also contends that the district court committed reversible error in several of its evidentiary rulings. We reverse.

I.

NCC is a small Pennsylvania company involved in the design and production of control systems and electrical devices for its various customers. It also was participating in the development and production of a new or "SNAP" type of telephone for MCI, a national telephone company exclusively engaged in providing long distance service. This "SNAP" telephone would allow consumers direct access to MCI's long distance telephone services by automatically dialing the MCI code numbers and would also reach the rotary market. The development of the project was to proceed in four phases and the project was subject to termination at any time for a variety of business reasons. The proposed new telephone was to use certain specific devices called COPS, microcontroller units which are a type of integrated circuit, essentially a computer on a chip, produced by NSC, a Delaware corporation based in California. NCC participated in the first, or "development," phase of MCI's project by supplying ten test telephones. The telephones contained COPS microcontroller units produced by NSC and sold to NCC in the summer of 1982. NCC raises no claim with respect to this phase and none of the damages awarded relate to it.

NCC also participated in the next, pre-test, phase of the project. MCI ordered 200 test telephones from NCC in December of 1982 for a total price of $27,400. Purchase orders for additional quantities were to be authorized "only after the 200 sets are tested, approved and accepted." Dissatisfied with the small quantity of telephones ordered, NCC sought to gain MCI's commitment to an order for 60,000 telephone units. MCI was unwilling to place such a large order and, after further negotiations, MCI issued a final purchase order on February 7, 1983, for an aggregate of 450 test telephone units at a total price of $55,400. MCI's purchase order specifically limited its purchase commitment to the 450 telephones.*fn1

NCC planned to use NSC's chips to produce the phones. Late in 1982, NCC entered into a contract with NSC, through NSC's agent CAM/RPC, in which it ordered a total of 1,200 microprocessor*fn2 units from NSC. NSC breached its contract and its warranties of merchantability and fitness for a particular purpose with respect to this order by delivering only a small number of defective microcontroller units. As a consequence, NCC supplied only 126 of the first 200 test telephone sets, and some of those failed because of the poor quality of the microprocessors supplied by NSC.

Notwithstanding the failure to make the required delivery for the 450 test telephones, MCI ordered 6,000 NSC COPS units from NCC in May of 1983 in anticipation of the third, or pilot test, phase of the SNAP phone project. The total purchase price of the order was $38,580. NCC in turn ordered 6,100 microcontroller units from the defendant for a purchase price of $35,014.*fn3 In addition, NCC sent MCI a price quotation for 5,000 telephones for this pilot test phase of the project, but MCI never issued a purchase order accepting that quotation.

NSC failed to delivery any of the 6,100 chips ordered by NCC and MCI eventually cancelled the purchase order for chips that it had placed with NCC. Some five months later, MCI terminated the SNAP phone project in its entirety.

After hearing evidence regarding NCC's relationship with MCI and its contracts with MCI and NSC, the jury found that NSC had breached its contract and its warranties of merchantability and fitness for a particular purpose and awarded $1,400,000 in damages to NCC. A large portion of this award can only represent the jury's acceptance of NCC's claims of "lost profits" on the potential sale of thousands of telephones to MCI. NSC's motions for a directed verdict and for judgment N.O.V. were denied.

II.

NSC challenges the denial of its motion for a directed verdict and for a judgment N.O.V. on several theories. It asserts that (1) the damages sought by NCC were not recoverable as a matter of law, (2) the evidence was too speculative to support a jury verdict, and (3) the jury's verdict was not supported by the evidence. Our review of the district court's denial of the judgment N.O.V. is determined by whether there is sufficient evidence in the record to sustain the verdict of the jury on the issue of consequential damages. Acosta v. Honda Motor Co., Ltd., 717 F.2d 828, 839-40 (3d Cir. 1983). The record must be viewed in the light most favorable to the non-moving party, and the denial of ...

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